Monthly Archive: August 2015

IRS Charitable Remainder Unitrust CRUT Audit

Welcome to TaxView with Chris Moss CPA Tax Attorney

Are you planning on giving a large gift to charity after you die?  The Charitable Remainder Unitrust (CRUT) and the Charitable Remainder Annuity Trust (CRAT) as per IRS Code 664 are great tax strategies for charitable giving.  The CRUT for example allows you to take an immediate charitable deduction on your income tax return, deferring the actual donation of the remainder of the trust until after your death, but at the same time allowing for you to live off the income of the trust while you are alive.  Sounds too good to be true?   It’s true, but unfortunately  the IRS  seems to be thinking otherwise,  waiting perhaps patiently I might add, until you die only to commence a CRUT Audit with disastrous results for for your children and other heirs at the conclusion of the CRUT Audit.  So if you have already established a CRUT or are thinking about setting up a CRUT stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out how to bullet proof your CRUT and related tax returns from adverse Government  audit action when the IRS CRUT audit team arrives shortly after you have passed.

While the Joint Committee on Taxation has always favored charitable giving deductions, Congress strictly limits the deductibility of the Charitable Remainder of your CRUT on your personal tax return to the present value of the CRUT remainder using a current qualified appraisal, as defined in § 1.170A-13(c)(3), from a qualified appraiser, as defined in § 1.170A-13(c)(5). Section 664(d)(2)(D) requires that the valued remainder be at least 10% of the property’s net fair value on the date of contribution.  After the initial appraisal year IRS Regulations 1.664.1, and 1.664.3 generally with some exceptions allows you to pay to yourself annually not less than 5% of the net fair value of the trust corpus.  Sounds pretty easy, but as Arthur Schaefer’s Estate found out in Schaefer v IRS US Tax Court (2015) there are IRS traps surrounding  CRUTS after you die which could make you turn over in the grave.

On February 21, 2006 Schaefer created a CRUT with a slight variation, an exception to the general rule as per Section 664(d)(3)(A).  The exception allowed Schaefer to distribute only the trust income for the year but limited by a fixed percentage. Trusts created under this exception are called Net Income Charitable Remainder Unitrusts (NICRUTs). Additionally, 664(d)(3)(B) allowed Schaefer to distribute to himself the current trust income in excess of the fixed percentage to the extent that the aggregate amounts distributed in prior years were less than the aggregate of the fixed percentage amounts for those prior years. Trusts using this provision are Net Income with Makeup Charitable Remainder Unitrusts (NIMCRUTs) and this is the trust Mr. Schaefer created.

Sure enough after Schaefer died, and after the Estate tax return Form 706 was filed, the IRS came knocking on Schaefer’s Estate door and indeed audited and disallowed the NIMCRUT charitable deduction in its entirety because the trusts did not meet the requirements of Section 664(d)(2)(D) in that the value of each remainder interest be at least 10% of the net fair value of the property on the date of contribution claiming Schaefer used an incorrect valuation method.  Schaefer’s appealed to Tax Court in Schaefer v IRS US Tax Court (7/28/2015).

Judge Buch opined that while the legislative history is rather unclear on this matter, nevertheless Congress gave the IRS the power to issue administrative guidance on the subject of valuing a remainder interest in a NIMCRUT citing Rev. Rul. 72-395, sec. 7.01 superseded by Internal Revenue Bulletin:  2005-34, which includes all the relevant Revenue Procedures including   Rev Proc 2005-52, 2005-53 and 2005-54 requiring the remainder interest of a NIMCRUT to be valued using the fixed percentage stated in the trust instrument, regardless of the fact that distributions are limited to trust income.   The Court observes that Schaefer was using a rate that was less than stated in the trust instrument.  When the Court converted the Schaefer rate to the fixed rate required by IRS regulations the Schaefer NIMCRUT remainder fell below the 10% threshold thereby terminating the entire NIMCRUT.  IRS wins Schaefer loses.

A second IRS trap, as Joseph Mohamed found out, is the requirements for a “qualified appraisal” in Mohamed v IRS US Tax Court (2012). Mohamed set up a CRUT in 2003 worth millions with the remainder to go to the Shriners Hospitals for Children.  Mohamed filed his tax returns along with Form 8283 claiming millions of dollars of charity deductions.  The IRS noticed this almost immediately and commenced a CRUT audit.  It turns out that Mohamed self-appraised his donations, albeit on the low side, but nevertheless, in violation of IRS regulations requiring a qualified appraisal by a qualified appraiser.   Mohammed retained a qualified appraiser, while the audit was ongoing, to perform a qualified appraisal and even though the remainder asset value appraised higher than Mohamed’s charitable tax deduction, the appraisal was performed simply too late to do any good.  The IRS invalidated the entire CRUT and disallowed the millions of deductions that Mohamed had claimed as a charity deduction.  Mohamed appealed to US Tax Court in Mohamed v IRS US Tax Court (2012).

The Court reluctantly ruled for the Government in that Mohamed did not comply with IRS regulations.  Judge Holmes sadly opines that this result is harsh–a complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions–all reported on forms that even to the Court’s eyes seemed likely to mislead someone who didn’t read the instructions. But the problems of bad appraisals of property was so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.  IRS wins Mohamed loses.

What does this mean for all of us who want to set up CRUT’s?  First, make sure you get a qualified appraiser to do a contemporaneously performed qualified appraisal of the remainder interest property that you are currently deducting as a charitable donation on Sch A of your Form 1040. Complete Form 8283 and attach the appraisal to the tax return in a PDF file at the time you file your tax return.  Second, hire the best tax attorney you can find to give you a written opinion that your CRUT, CRAT, NICRUT or NIMCRUT complies with IRS Code 264 and IRS Revenue bulletin 2005-34 including Revenue Procedure 2005-52, 2005-53 and 2005-54.  Give that legal opinion to your children to hold on to as there is a good chance the IRS is out there patiently waiting for your passing.  Finally, introduce your children to your tax attorney so they know what to expect after your pass.  There is a good chance your Estate be subject to an IRS CRUT audit after your passing, and at least you can rest in peace knowing that your tax returns will survive with your Estate protected and safe from harm’s way.

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney

Make sure to join us next time on TaxView when we will take closer look at where Domestic Asset Protection Trusts DAPTs and Spousal Lifetime Access Trusts SLATs are trending in 2015.

Kindest regards,

Chris Moss CPA Tax Attorney

IRS Foreign Income Exclusion

Welcome to TaxView with Chris Moss CPA Tax Attorney

Did you know if you are working and living abroad you can exclude from taxation your foreign income under IRS Section 911(a)? You just have to pass one of two tests: The Bona Fide Residence Test or the Physical Presence Test.  If you qualify under one of these two tests then you are good….that is, until the IRS comes to see you and commences a Foreign Income Exclusion Audit. So if you are abroad, or plan to be, and are going to be earning income there, stay tuned to TaxView with Chris Moss CPA Tax Attorney to see what tax traps the Government has waiting for you when the IRS Foreign Income Exclusion Audit team comes knocking on your door.  Before you leave town learn how to create the facts and evidence you need to fight back an IRS Foreign Income Exclusion Audit….and win….on TaxView with Chris Moss CPA Tax Attorney.

Americans earning income abroad have since 1926 been allowed to exclude from taxable income under 911(a) but only if they were a “bona fide non-resident” of the United States for at least a year.  To qualify as a “bona fide non-resident” though you also need to establish a residence in the foreign country which is not always the same as your permanent home or domicile and for IRS purposes you must make a valid and timely election under Regulations 1.911-7(a)(2).  This is easier said than done as Ms. McDonald found out in a just released decision from US Tax Court this week in Nancy McDonald vs IRS US Tax Court August 25, 2015 which illustrates how important it is to make a valid and timely election to take advantage of the foreign exclusion.

The facts are relatively complex in that McDonald was living abroad and did not file a tax return in 2009.  The IRS prepared a substitute tax return and then issued a notice of deficiency.  McDonald the filed the 2009 return two years late claiming foreign earned income exclusion.  The IRS audited and disallowed the exclusion claiming McDonald failed to make a valid election under 1.911-7(a)(2). McDonald appealed to US Tax Court in McDonald v IRS US Tax Court (8/25/2015) claiming she made a valid election or in the alternative the election requirements were unreasonable and not specifically authorized by law.

The Court notes the IRS promulgated regulations, even though Congressional law is silent on when and how to make the election.  You can chose from four alternative timing methods to make the election three of which involve Form 2555: 1. Attach From 2555 to your income tax return timely filed 2. Attach Form 2555 with your return filed by amendment. 3. Attach Form 2555 with your the original return filed within one year after the due date and 4. Attach Form 2555 with your return filed after the deadline provided that you owe no federal tax including the exclusion and file Form 2555 before the IRS catches you OR in lieu of Form 2555 print on the top of the tax return “filed pursuant to Section 1.911-7(a)(2)(i)(D).

McDonald argues that if she had simply included on the top of the first page the required statement she would have made a valid election and owe no tax, in effect, that her omission of this statement should be excused because only the regulations, not Congressional law make this a requirement and that the requirements are unreasonable.  Judge Gustafson opines “…it is true that the Code Section 911(d)(9) makes no mention of the timing of the election but rather provides the Secretary shall prescribe such procedures…” The Court therefore concludes that the regulation provides taxpayers with four alternative methods by which they can timely elect the exclusion. The fact that the Secretary could have chosen longer periods within which to permit the election is of no consequence, because the alternative methods with four varying periods are reasonable.  IRS Wins McDonald Loses.

So now that you have made a valid election, as Hermine Dinger found out, you must work for a foreign company or government that has no connection with an American company or business or US Military or US Military Agency.  Hermine Dinger thought she was able to exclude the income earned from ADD, the German authority of the Minister of Internal Affairs that administered payroll for civilian employees of the US Army.   The IRS audited and disallowed her exclusion.   Dinger appealed to US Tax Court in Dinger v IRS US Tax Court (8/ 6/ 2015) claiming she was paid by a German Government office.  The Court easily found for the Government finding that Dinger worked for the United States even though the ultimate source of her income was foreign.

Our final case illustrates how difficult it is to qualify living abroad under Section 911(a), as Joe Evans found out in Evans v IRS US Tax Court (1/20/2015).  Evans worked in Russia in the oil industry and filed tax returns from 2007-2010 prepared by Bradley Borden, a tax professional, claiming that his tax home was Russia.  The IRS audited all 4 years disallowing the foreign earned income exclusion claiming Evans was not a bona fide Russian resident.  Evans appealed to US Tax Court in Evans v IRS US Tax Court (1/20/2015)

The Court notes that Section 911(d)(3) carves an exception out in that if a person has a home or an “abode” within the United States during his foreign residency Evans cannot establish that his tax home is in a foreign country, citing Jones v Commissioner 927 F.2d 489 (5th Cir. 1991).   Evans had invariably some connections with the foreign country in which he works, but if his ties to the United States are stronger, we have held that his “abode” remains in the United States citing Harrington v Commissioner 93. T.C. 297 (1989).  Unfortunately for Evans, he still was registered to vote in his home state of Louisiana, possess a Louisiana Driver’s license and had a Louisiana bank account.

Judge Lauber easily finds for the Government showing that Congress limited the benefits of Section 911(d)(3) to discourage folks from incurring duplicative costs of maintaining distinct US and foreign households citing again Jones v Commissioner 927 F.2d 489 (5th Cir. 1991).   IRS wins Evans loses.

In conclusion, if you are planning to work abroad and want to take advantage of Section 911(a) Foreign Income Exclusion, first, before you leave the United States make sure you retain the services of a tax attorney to plan out your tax strategy so that you not only legally elect the exclusion, but you have the contemporaneous evidence created to insert into your next tax return before you leave the country so that the Government will have on record your election.  Second, if in the very likely event you get audited by the IRS retain that same tax attorney to defend you so she can apply the law to your unique set of facts and circumstances that she helped create for you years earlier. Finally sit back and relax wherever you are in the world as you win your IRS Foreign Income Exclusion Audit with a bullet proof protected tax return.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.

Kindest regards

Chris Moss CPA Tax Attorney

IRS Alimony Audit

Welcome to TaxView with Chris Moss CPA Tax Attorney

While it is hard to believe that a divorcing spouse in the 21st century would need or want Alimony, it is even harder for many to understand why Alimony is so often litigated by divorced taxpayers in United States Courts.   Furthermore, since Alimony is taxable usually to the wife, and tax deductible usually to the husband, IRS Alimony audits Whipsaw a husband or wife against each other with the Government very often winning by default.  So if you are paying or receiving alimony and not aware of the danger ahead please stay with us here on TaxView with Chris Moss CPA Tax Attorney to see where IRS Alimony Audits are trending in 2015 so you can make sure tax return is safe and protected if an IRS agent comes knocking on your door.

Alimony also known as spousal support or maintenance derives from ancient ecclesiastical laws requiring husbands to continue to support their wives.  Eventually when “fault” divorce became legal it was the party “at fault” usually the husband, who would be required to pay Alimony, particularly because until recently, women could not own real estate.

I was surprised to find that in 2015 alone to date there were already nine (9) Alimony US Tax Court Opinions and hundreds of Alimony audits commenced around the country this year, many of which will end up in IRS Appeals and US Tax Court years from now.  In the last 10 years there have been probably thousands of IRS Alimony Audits.  Why is there so much litigation over Alimony?  Is Alimony tax law that complex?  Let’s ask the Court this question as we review hot off the press last week, Crabtree v IRS US Tax Court 2015.

The facts in Crabtree are simple. Crabtree (formerly Mrs. Girard) was married to Donald Girard until 2006. The Girard’s petitioned the Delaware Family Court in an uncontested proceeding “without a hearing”.  The Divorce Agreement required “unallocated alimony/child support for 8 years”.  Crabtree filed her 2010 tax return and did not report this money as taxable Alimony.  The IRS audited Crabtree requiring her to be taxed on what the Government concluded to be Alimony. Crabtree appealed to US Tax Court in Crabtree v IRS US Tax Court 2015.

Judge Lauber notes that IRS Code Section 71(a) provides that gross income includes amounts received as Alimony subject to 4 conditions as per 71(b).  First the payment must be received by wife under a divorce agreement.  Second the agreement does not include the payment as a property settlement.  Third the husband and wife must be living in separate households, and fourth, the payment must terminate upon death of the wife.

It is fourth condition, termination at death of recipient that the Court found ambiguous because the Divorce Agreement was silent on whether Mr. Girard’s Alimony obligation terminated upon Crabtree’s death. The IRS argued that Delaware law Title 13 Section 1512(g) controls in this case.  The IRS further argued that with these facts Delaware recognizes these payments as Alimony.

The Court however found for Crabtree who argued that the Delaware “order” was entered without a hearing and “agreed by the parties in writing” as required by Del. Code section 1519(b) and could have been construed as not terminating upon death.  Judge Lauber in a very close call opines that both the Divorce Agreement and Delaware law are unclear and finds for Crabtree in that “Delaware law does not unambiguously provide for automatic termination in the event of death.” Crabtree wins IRS loses.

The next case Iglicki v IRS US Tax Court April 27 2015 involves a Maryland divorce in 1999.  The Agreement required Iglicki to pay $1000 a month in spousal support “but only if he would default.”  After the divorce the Iglicki moved to Colorado and defaulted.  The ex-wife Stultz sued in Colorado for spousal support and won a judgement against the Iglicki.  In a post-judgement proceeding Stultz obtained a Court ordered garnishment of Iglicki’s wages.  Iglicki deducted the garnished wages on his tax return as Alimony.  The IRS audited and disallowed the deduction.  Iglicki appealed to US Tax Court Iglicki v IRS US Tax Court April 27 2015.

The question presented to the Court was whether or not the Iglicki’s financial obligation terminated upon death of Stultz.  The Court recognized, as the Court did in Crabtree, that when a divorce agreement is silent as to the existence of a postdeath obligation, the requirements of section 71(b)(1)(D) may still be satisfied if the payments terminate upon the payee’s death by operation of State law in this case Colorado, citing. Johanson v. Commissioner, 541 F.3d at 973.

Judge Kerrigan finds that Colorado law, unlike Delaware law in Crabtree, very clearly requires future spousal support obligations to terminate at the death of either spouse unless otherwise agreed in writing or expressly provided in the decree.  But also under Colorado law after Stultz received a judgement against Iglicki the obligation of Iglicki previously considered Alimony was legally converted to a “past due” judgement.  Under Colorado law an Estate can enforce a judgement even after the death of the debtor.  Therefore spousal support obligations that have converted to a judgement in Colorado fail to qualify as Alimony under Federal tax law. IRS wins, Iglicki loses.

Our final case again involves simple facts in Muniz v IRS US Tax Court July 9, 2015.  Muniz husband and wife Filippini divorced in Palm Beach Florida in 2009. Muniz was required to pay $45,000 to Filippini and deducted Alimony on his 2011 return.  IRS audited and claimed the $45,000 was a nondeductible property settlement. Muniz appealed to US Tax Court in Muniz v IRS US Tax Court July 9, 2015.

The Government argued that even though the $45,000 was a lump-sum alimony payment, it could not be Alimony because under Code 61.08 of the Florida Code the Filippini’s estate upon her death would continue to have a vested right to collect the $45,000 lump sum. Judge Nega agreed with the Government concluding that under Florida law, lump-sum alimony constitutes a property settlement for Federal income tax purposes and therefore is not deductible as Alimony.  IRS wins, Muniz loses.

By now you all can see why on very simple facts Alimony payments could easily become nondeductible after commencement of an IRS Alimony audit.

What can you all do now?   First, if you are going through a divorce and have moved to a new State, or you are experiencing Alimony collection issues in your current State, make sure you have tax attorney confer with your divorce attorney to make sure you are protected in the very likely event of an IRS Alimony audit commencing shortly after Court action.  Second, require whoever prepares your tax return to give you a written opinion on whether your Alimony payments are tax deductible or not and include this contemporaneously created document in your tax return before you file.  This evidence will prove invaluable if and when an Alimony audit comes your way.  Finally be prepared for the Whipsaw and hopefully with a properly prepared tax return you will be the one that wins.

Thank you for joining us here on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

The IRS Gig Worker Audit

Welcome to TaxView with Chris Moss CPA Tax Attorney

All business owners at one time or another have had to make a choice between classifying a new worker as an employee or an independent contractor.  For most part in the 20th century these choices were easy to make.  But in the 21st century a unique worker has begun to emerge that is somewhere between an employee and an independent contractor, the “Gig Worker” or what some may call the Gigs.  While Judge Edward Chen O’Conner v Uber 3:13-cv-03826 ruled against the existence of Gigs, the California Uber case is far from over.  Whatever the ultimate outcome in Uber, in my view Gigs are here to stay.  What or who are the Gigs and how will they be evaluated during an IRS audit of your business?   Stay with us here on TaxView with Chris Moss CPA Tax Attorney to see where Gig law is trending in the 21st century and what you need to do now to protect yourself from an IRS Gig Worker Audit.

So what is Gig and who are the Gigs?  It all started with Uber.  Not only are there now Gig Uber Drivers but Uber Medicine Gigs called “healers”.  In the last few years we are being invaded and inundated by Gigs.  Unfortunately US tax law has not caught up with the rapid rise of Gigs, who in my view are simply independent contractors being directed by cell phone apps by you all out there to fulfill an immediate need, either providing a service, product or both.

Just so you know, Gig was coined in the early 20th century as slang for a paying musical engagement.  The Urban dictionary now defines Gig as a job that could now apply to contract work in the IT and computer field or any temporary or incidental employment.  However, the Gig has traveled or “Ubered” way beyond even Urban Dictionary’s definition.

In order to best define a Gig and understand the tax law of Gigs or lack thereof, let’s take a look at the 20th century worker.  These folks, our parents and grandparents all had a 9-5 job as their primary source of income.  Taxes were withheld and work was reviewed by the “boss” at a company office.  Independents back in those days were according to the current IRS web site the tradesmen and professionals who earned income from many customers, clients, and patients, such as Doctors, Lawyers, and other self-employed contractors.

In my view Gigs are legally somewhere in the middle between Employees and Independent Contractors.  Gigs come to life when you all click on an Uber app and ask that a Gig driver to drive you from Point A to Point B.  The Gig driver is star rated by the public and develops a “branding” based on those ratings.  Over a few months, each Gig develops a unique brand or “good will” based on their star ratings from folks around the world who have used their services. The legal status of Gig drivers, could be compared to the legal status of Gig Nurses, Gig Landscapers, Gig Fitness Trainers, Gig Pilots, and Gig Dog sitters to name a few.  The fact that Uber supplies the App to us to find us the Gig driver, or HEAL supplies the App to find us the Nurse healer, is not the point.  The point is Uber, HEAL, and all the other service Apps simply put the buyer and seller of the service together electronically, kind of like EBay does. The world wide customer base of the individual Gig “controls” how successful the Gig will be, just like EBay sellers are controlled by their star world wide ratings.

Would anyone claim sellers on EBay are employees of EBay?   The similar question was presented to Judge Chen in O’Conner v Uber 3:13-cv-03826, where the the the Court is grappling with whether Gig drivers found via the Uber app are employees.  Unfortunately, because Congress and the Courts have been caught off guard by the rise of the Gigs, the Government during an IRS Gig Worker Audit may be unable to find that middle ground in existing tax law to allow you the business owner to have a no change audit.  So listen up on TaxView with Chris Moss CPA Tax Attorney as you learn how whether or not you win comes down to one simple word: “control”.

The key issues in existing law is “control” over the worker, as in Jones v IRS US Tax Court 2014.   Facts are simple enough.  Jones an attorney hired Tarri’s Business Service (TBS) as an independent contractor owned by his wife Mrs. Jones.  They filed separate tax returns. The IRS audited and claimed TBS was really a disguised employee of Jones and should be classified as an employee.  Judge Goeke easily finds Jones for because Jones did not control the details of TBS work schedule, thereby making TBS an independent contractor.  In other words, Jones did not “control” TBS.  Jones wins, IRS loses.

The facts are just as simple in Central Motorplex v IRS US Tax Court (2014). Central Motorplex (CM) engaged in buying, repairing and selling used autos. Mr. Smith was contracted to pick up and deliver license plates and title certificate as an independent contactor.  The IRS audited and claimed Smith was an employee.  Judge Lauber easily found for the Government because CM assigned Smith tasks, supervised his performance and set his compensation.  In other words, CM was in “control” of Smith. IRS wins, CM Loses.

So what does this all mean for all of us out there who might be paying for Gig services?  While Judge Edward Chen opines in his Order of March 11, 2015 “…it is conceivable that the legislature would enact rules particular to the new so-called “sharing economy..,” the IRS, Congress and the Courts, have yet to recognize the legal significance of the 21st century Gig worker.  So first, for now, our best practice perhaps is to have your tax attorney create standard “Gig Contracts” showing you have absolutely no control over the Gigs.  The easiest way to do this is to allow your Gig to receive public ratings so the public  controls the Gig not your business.  Second, include the Gig Contract in a PDF file attached to your business tax return so that if you are audited years later you will have a document in the tax return supporting your Gig strategy. Finally have your tax attorney standing by with the contemporaneously created documentation, so that when the IRS Gig Worker Audit comes your way you can be confident you will win and save taxes.

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney